Is It Inefficient Investment that Causes the Diversification Discount?

Toni M. Whited

432 citations0/0 files storedThe Journal of Finance

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Corporate Finance and Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

ABSTRACT Diversified conglomerates are valued less than matched portfolios of pure‐play firms. Recent studies find that this diversification discount results from conglomerates' inefficient allocation of capital expenditures across divisions. Much of this work uses Tobin's q as a proxy for investment opportunities, therefore hypothesizing that q is a good proxy. This paper treats measurement error in q . Using a measurement‐error consistent estimator on the sorts regressions in the literature, I find no evidence of inefficient allocation of investment. The results in the literature appear to be artifacts of measurement error and of the correlation between investment opportunities and liquidity.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 432 citations exist upstream.

References

1988Financing Constraints and Corporate Investment 1987Financing Constraints and Corporate Investment 1982Tobin's Marginal q and Average q: A Neoclassical Interpretation 1995Diversification's effect on firm value 1994Tobin's q, Corporate Diversification, and Firm Performance 1997Internal Capital Markets and the Competition for Corporate Resources 2000The Cost of Diversity: The Diversification Discount and Inefficient Investment 1986Errors in variables in panel data

Cited by

2003Founding‐Family Ownership, Corporate Diversification, and Firm Leverage 2009The anatomy of bank diversification 2006Technological diversity, related diversification, and firm performance 2002Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy 2017Tracing out capital flows: How financially integrated banks respond to natural disasters 2004Corporate Finance in Europe Confronting Theory with Practice

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.